(3)there is any allocation of employer securities which violates the provisions of section
409(p), or a nonallocation year described in subsection (e)(2)(C) with respect to an employee stock ownership plan, or

(4)any synthetic equity is owned by a disqualified person in any nonallocation year,

there is hereby imposed a tax on such allocation or ownership equal to 50 percent of the amount involved.

(b) Prohibited allocation

For purposes of this section, the term “prohibited allocation” means—

(1)any allocation of qualified securities acquired in a sale to which section
1042 applies which violates the provisions of section
409(n), and

(2)any benefit which accrues to any person in violation of the provisions of section
409(n).

(c) Liability for tax

The tax imposed by this section shall be paid—

(1)in the case of an allocation referred to in paragraph (1) or (2) of subsection (a), by—

(2)in the case of an allocation or ownership referred to in paragraph (3) or (4) of subsection (a), by the S corporation the stock in which was so allocated or owned.

(d) Special statute of limitations for tax attributable to certain allocations

The statutory period for the assessment of any tax imposed by this section on an allocation described in subsection (a)(2) of qualified employer securities shall not expire before the date which is 3 years from the later of—

(1)the 1st allocation of such securities in connection with a qualified gratuitous transfer (as defined in section
664(g)(1)), or

(2)the date on which the Secretary is notified of the allocation described in subsection (a)(2).

(e) Definitions and special rules

For purposes of this section—

(1) Definitions

Except as provided in paragraph (2), terms used in this section have the same respective meanings as when used in sections
409 and
4978.

(2) Special rules relating to tax imposed by reason of paragraph (3) or (4) of subsection (a)

(A) Prohibited allocations

The amount involved with respect to any tax imposed by reason of subsection (a)(3) is the amount allocated to the account of any person in violation of section
409(p)(1).

(B) Synthetic equity

The amount involved with respect to any tax imposed by reason of subsection (a)(4) is the value of the shares on which the synthetic equity is based.

(C) Special rule during first nonallocation year

For purposes of subparagraph (A), the amount involved for the first nonallocation year of any employee stock ownership plan shall be determined by taking into account the total value of all the deemed-owned shares of all disqualified persons with respect to such plan.

(D) Statute of limitations

The statutory period for the assessment of any tax imposed by this section by reason of paragraph (3) or (4) of subsection (a) shall not expire before the date which is 3 years from the later of—

(i)the allocation or ownership referred to in such paragraph giving rise to such tax, or

(ii)the date on which the Secretary is notified of such allocation or ownership.

2001—Subsec. (a). Pub. L. 107–16, § 656(c)(1), added pars. (3) and (4) and, in concluding provisions, substituted “there is hereby imposed a tax on such allocation or ownership equal to 50 percent of the amount involved.” for “there is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.”

Subsec. (e). Pub. L. 107–16, § 656(c)(3), amended heading and text of subsec. (e) generally. Prior to amendment, text read as follows: “Terms used in this section have the same respective meaning as when used in section
4978.”

1997—Subsec. (a). Pub. L. 105–34, § 1530(c)(15), amended heading and text of subsec. (a) generally. Prior to amendment, text read as follows: “If there is a prohibited allocation of qualified securities by any employee stock ownership plan or eligible worker-owned cooperative, there is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.”

Amendment by Pub. L. 107–16applicable to plan years beginning after Dec. 31, 2004, except that in the case of any employee stock ownership plan established after Mar. 14, 2001, or established on or before such date if employer securities held by the plan consist of stock in a corporation with respect to which an election under section
1362(a) of this title is not in effect on such date, amendment applicable to plan years ending after Mar. 14, 2001, see section 656(d) ofPub. L. 107–16, set out as a note under section
409 of this title.

Effective Date of 1997 Amendment

Amendment by Pub. L. 105–34applicable to transfers made by trusts to, or for the use of, an employee stock ownership plan after Aug. 5, 1997, see section 1530(d) ofPub. L. 105–34, set out as a note under section
401 of this title.

Effective Date of 1989 Amendment

Amendment by Pub. L. 101–239applicable to estates of decedents dying after Dec. 19, 1989, see section 7304(a)(3) ofPub. L. 101–239, set out as a note under section
409 of this title.

Effective Date of 1986 Amendment

Amendment by section 1172(b)(2) ofPub. L. 99–514applicable to sales after Oct. 22, 1986, with respect to which election is made by executor of an estate who is required to file the return of the tax imposed by this title on a date (including extensions) after Oct. 22, 1986, see section 1172(c) ofPub. L. 99–514, set out as a note under section
409 of this title.

Effective Date

Pub. L. 99–514, title XVIII, § 1854(a)(9)(D),Oct. 22, 1986, 100 Stat. 2878, provided that: “The amendments made by this paragraph [enacting this section and amending section
1042 of this title] shall apply to sales of securities after the date of the enactment of this Act [Oct. 22, 1986].”

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and
1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 ofPub. L. 99–514, as amended, set out as a note under section
401 of this title.

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